Washington Monthly - September/October 2012 - 38

Making a lot of money on the Internet tends to involve building platforms for electronic commerce. The great thing about it is that you don’t have to build thousands of different platforms that are physically located near your customers. You only have to build one. EBay? A platform for auctions and person-to-person sales. Amazon? First a platform for books and now for a great many other things. Craigslist is a platform for buying and selling things that are inherently local, like concert tickets, apartment rentals, used stereo equipment, and prostitutes. Netflix is a platform for buying and selling movie rentals, iTunes for music, the iPhone for apps. The platform builders are kings of the virtual universe. And, of course, Facebook: the social platform. With a key difference. The first generation of platforms involved taking small pieces of larger transactions. Wal-Mart had $447 billion in revenues last year, but in a way that overstates the size of the company, because it also had over

Higher education is a publicly subsidized, heavily regulated, culturally entrenched sector that has stubbornly resisted digital rationalization. But the defenders of the ivy-covered walls have never been more nervous about the Internet threat.
$400 billion in expenditures, most of which went to buying things from manufacturers and reselling them to customers. When a customer rings out of Wal-Mart with a bill of $100, most of that money doesn’t go to Wal-Mart shareholders. It goes to a combination of Wal-Mart’s suppliers and the millions of people who work as employees in Wal-Mart stores. Facebook is different. Its pays nothing for the untold terabytes of valuable information exchanged on its platform. The users generate it themselves. It doesn’t pay for the telecommunications infrastructure needed to exchange information—that’s between users and giant telecoms like Verizon, Comcast, and AT&T. The only cost to Facebook is software development and data storage, which becomes ever cheaper as Moore’s law and its storage equivalents march on. And because it only has to build one platform, not thousands, it only has to employ a few thousand employees, not, like Wal-Mart, more than
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two million. In May, Facebook launched the largest tech IPO of all time. So the VC guys and the start-ups look at K–12 and higher education, which between them cost over $1 trillion per year in America, and much more around the world. They see businesses that are organized around communication between people and the exchange of information, two things that are increasingly happening over the Internet. Right now, nearly all of that communication and exchange happens on physical platforms— schools and colleges—that were built a long time ago. A huge amount of money is tied up in labor and business arrangements that depend on things staying that way. How likely are they to stay that way, in the long term? Sure, there are a ton of regulatory protections and political complications tied up in the fact that most education is funded by the taxpayer. As always, the timing would be difficult, and there is as much risk in being too early as too late. Still, $1 trillion, just sitting there. And how much does it cost for a firm like Learn Capital to invest in a few people sitting around a table with their MacBook Airs? That’s a cheap lottery ticket with a huge potential jackpot waiting for whomever backs the winning education platform. After chatting with Nathaniel for a while, I eventually yield the floor to a young guy named Parker, an aspiring entrepreneur who graduated from Amherst last May, who’s come to pitch an idea for a start-up in hopes of scoring seed money. In November he had an idea for a new company he calls eHighLighter, which sells a smartphone app that lets you take a picture of a book page and convert it to a document on which you can then highlight text, categorize it, save it, and otherwise organize it in useful ways. He put some bootstrapping money together and used it to hire six computer programmers in Bangalore to design the “user interface” and “user experience” (UI and UX) for the company. He gives a short, practiced explanation of what the app does, then pulls out his white iPhone—everyone here has not only an iPhone 4S but a white iPhone 4S— and shows Nathaniel some screen captures of the product. The pitch takes about five minutes. Nathaniel nods, listens, and says, nicely but decisively, “I’m not sure I buy it.” He sees eHighLighter as an intermediate technology, a bridge to the eventual transition from paper to electronic books. What then? Parker is ready for this and cites statistics about the slow rate at which libraries are scanning in physical books, and they have a friendly back-and-forth about this, with Nathaniel offering useful advice about going after specific market segments—PhD candidates who live in archives, for example. But his initial judgment remains unchanged. Parker doesn’t seem particularly crestfallen. It’s his first pitch; there will probably be more, and the prospect of hitting a home run never seems that far off around

Washington Monthly - September/October 2012

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